Keep an Eye on Chesapeake

Technology stocks have taken a beating in recent weeks amid apparent upside exhaustion, but energy is one industry that hasn't felt the burn. It's difficult to miss the buzz: The sector is hot right now, and the U.S. is presently the world's top natural gas producer, with expectations that it will surpass both Saudi Arabia and Russia in oil production as early as next year. Moreover many speculate that America's energy boom is still in its infancy.

This brings me to Chesapeake Energy (CHK), which is one of my favorite energy stocks for the future.

Chesapeake is an exploration-and-production company focusing on natural gas, oil and natural gas liquids (NGL) in underground U.S. reservoirs. Most recently, on Thursday, the company made headlines with plans for a $3 billion bond offering. TheStreet Ratings team has appraised Chesapeake as a Hold, as do many other firms, but I feel this sentiment will shift in the months ahead. Currently only five analysts rate it a buy-equivalent, while 19 rate it as a hold, leaving one sell rating.

While Chesapeake's revenue growth that has exceeded the industry average, its earnings per share declined in the fourth quarter -- but the company expects this to change in the year ahead. It has sold off some assets already in 2014, and has plans to sell more in the coming year -- transactions that it expects to generate approximately $650 million. These assets primarily concern Chesapeake's marketing, gathering and compressing operations, and are not expected to have a significant impact on the company's cash flow or profit margin. As the assets are related to the company's natural gas operations, moreover, their sale can be viewed as one more step toward greater diversification.

At the moment, Chesapeake is the second-largest producer of natural gas in the U.S., and last year nat gas accounted for roughly three-quarters of its production. This is at a time when U.S. utilities have been trending from coal-fired to gas-fired utilities, and when the potential exportation of liquefied natural gas has begun to capture the market's attention. New export terminals, in fact, are already being approved to send more natural gas resources abroad.

Still, while these are all positive bits of news for the company, the focus on nat gas makes Chesapeake vulnerable to the price fluctuations in the commodity. As a result of this, the company has been increasing its focus on oil. The next earnings report, scheduled for May 7 before the open, should give us a hint as to the impact of these most recent changes.

From a technical standpoint, Chesapeake's stock development is also of interest. On the monthly chart, the shares have been trading in a wide range for years -- but, in 2013, the stock gained upside momentum within that channel, and it has been basing at weekly highs ever since. Volume has dropped, suggesting a lack of strong selling interest, and the stock has indeed been trading in a holding pattern. It may even continue to hold this range throughout 2014, since many of its corrections tend to last 12 to 18 months (as shown in purple on the above chart).

That said, the range itself can be seen as an opportunity to build a position in Chesapeake at lower levels -- and with tighter stops than what will be possible once a breakout is confirmed and prior highs give way. One example of such an opportunity came late last month, when Chesapeake shares moved from the upper end of the weekly channel to the lower end. That shifted momentum on a second wave of selling into the low, and the upside break in this second drop triggered a swing trade buy strategy.

If and when the stock comes off the upper level of this range again, and sees accompanying shifts in momentum, you could potentially employ further buy strategies on these smaller time frames -- which could then transition into longer-term holds.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.